Company and Close Corporation Law

• Published date: 14 April 2023
• Pages: 176-238
• Author: Jooste, R.
• Date: 14 April 2023

176

1. INTRODUCTION

The year under review has, unsu rprisingly, seen issues relating to bu siness

rescue feature promi nently in the courts. The ju risdiction of the Labour

Court in relation to employment-related claims agai nst a company under

business rescue ha s been addressed, as well as, amongst other is sues, the

effect of business res cue on suretyships; the power divide between t he

business rescue practit ioner and the directors of a company under business

rescue; and the setti ng aside of a vote rejecting a busi ness rescue plan.

Apart from business resc ue the courts have, inter alia, upheld the

appraisal rights of minority sh areholders; examined the factors that a court

must consider in deviating from the default position t hat a company in the

process of being wound up may not make unlawf ul dispositions; dismissed

the contention by a company seeking to avoid a winding-up order on the

basis that it had a counterclaim agai nst the applicant; determined t hat

property in a deregister ed company be declared bona vacantia i n favour of

the state; and ‘pierced the corporate veil’ of an incorporated firm of attor neys

on the basis that the company was the ‘alter ego’ of its principal member.

2. LEGISLATION

No legislation was enacted in the pe riod under review.

Company and Close Company and Close

Corporation LawCorporation Law

Richard Jooste*

* BA BCom (Hons) LLB (UCT) Diploma in Comparative Legal Studies LLM (Cantab);

Professor of Law (Emeritus), University of Cape Town; Attorney of the High Court of South

Africa.

2021/2022 YSAL 176

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CompANY ANd CLose CorporAtIoN LAW 177

3. CASES

3.1 APPRAISAL RIGHTS

Section 164 of the Companies Act1 (the Act) deals with a shareholder’s

appraisal rights. An appraisal rig ht is the right of dissenti ng shareholders,

on the occurrence of cer tain events, to have their shares bought out by the

company in cash, at a price reflecti ng the value of the shares. It is not a

general right but is triggered in sp ecial circu mstances only. It provides the

dissenting sha reholder with a no-fault remedy. The exercise of the remedy

does not require fault, wrongdoing or unfai rness. The remedy is tr iggered

where the company proposes the passing of a spec ial resolution to:

• dispose of all or a greater part of its ass ets or undertaking;2

• enter into an amalgamation or merger;3

• implement a scheme of arrangement;4 or

• amend its Memorandum of Incorporation by altering the preferences,

rights, limitations or other ter ms of any class of its shares in any manner

materially adverse to the rights or interest s of holders of that class of

shares, as contemplated in s 37(8).

In First National Nominees (Pty) Ltd v Capital Appreciation5 the issue before

the court was whether the deci sion of Capprec’s board under s 48(2)(a) of

the Act, to purchase their company’s own shares, trigger ed the dissenti ng

shareholders’ appraisal rights under s 164. It was contended by the

dissenting sha reholders that the decision was one falli ng under s 48(8)(b),

being a decision by the company to acquire more th an 5% of the issued

shares of a class of the company’s shares as contemplated in the se ction.

The shareholder of Capprec, Nominees, sought to exercise its appraisal

rights in terms of s 164. Capprec opposed Nominees’ exercise of its appraisal

rights.

Capprec argued that none of the circ umstances set out in s 164(2) that

triggered such rights was pres ent. It argued, more specifically, that the

proposed buy-back of shares was not a transact ion ‘contemplated under

s 114’. Section 114, it was contended, envisioned a ‘scheme of arrangement’

between the company and the holders of any class of its sh ares in a manner

contemplated in s 114(1)(a)–(f); in al l instances there h ad to be the requirement

of coercion, and not consensual ag reements between the company and t he

seller of shares such as i n the present case. Capprec argued that, to the extent

that s 48(8)(b)6 required t hat the transaction was subject to the requi rements

1 71 of 2008.

2 See s 12 of the Act.

3 See s 113 of the Act.

4 See s 114 of the Act.

5 2021 (4) SA 516 (GJ).

6 Section 48 regulates buy-backs.

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YeArbooK oF south AFrICAN LAW

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of ss 114 and 115, it was only a reference to the procedural requ irements of

ss 114 and 115. It did not deem a transact ion which was not a scheme to be

a scheme.

The court focused on whet her or not Nominees, in the ci rcumstances

pertaini ng to the transact ion in question, was entitled to exercise t he

appraisal rights afforded to it in term s of s 164 of the Act.

Nominees argued t hat the requirements of s 114 of the Act were not

made applicable to the transaction because t he transaction was not a

scheme of arrangement. The requ irements of ss 114 and 115 of the Act

were made applicable to the transaction because t he transaction cro ssed

the 5% threshold for a repurchase by t he company of its own shares, as

stipulated by s 48(8)(b). Consequently, whether or not the transaction was an

‘arrangement’ as provided for in s 114(1) was irrelevant because s 48(8)(b) of

the Act makes the requi rements of ss 114 and 115 applicable.

The court ruled in favour of Nomi nees, upholding its claim to appraisal

rights in the situation presented. T he court reasoned as follows:

• It was clear that the legislature was part icularly concerned that adequate

protection be afforded to minor ity shareholders. The appraisal remedy

is aimed at maintai ning the equilibrium between mi nority shareholders

and controlling shar eholders. But, although s 164 appraisal rights enable

the shareholder to ‘sell’ its shares to the company at their fair value, the

appraisal remedy will afford l imited protection again st coercive and

proportionate repurchase s, except that the shareholder will be able to

ensure a fair price. It may be a usefu l remedy in the case of a select ive

repurchase from wh ich the dissenting shareholder is excluded.

• The appraisal right is intended to thwart not on ly opportunism, but also

ill-advised busines s decisions by the board of dire ctors. In this regard,

the board will be more easi ly swayed to abandon an unwise trans action

if a substantial number of sh areholders dissent from it and invoke their

appraisal rights. This i s in view of the cash drain that the company would

otherwise face in h aving to buy out the dissenters’ shares at a fai r value

in cash. In essence, the appraisa l right enables a dissenti ng shareholder,

in certain stat utorily prescribed circ umstances, to force the company

to purchase its shares i n cash at a price reflecti ng the fair value of the

shares, and to exit the company.

• In the circumsta nces, regardless of whether (as a fact) the transact ion

which Capprec had sought to implement was a scheme of arrangement

or not, it was a transaction which cros sed the 5% share repurcha se

threshold contemplated in s 48(8)(b) of the Act, thereby invoking the

requirements of the provisions of ss 114 and 115 of the Act, which in

turn vested the applicants i n this application with the right to obtain the

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